Hartford Fire Ins. Co. v. Maryland Nat. Bank, N.A.
Decision Date | 01 September 1995 |
Docket Number | No. 21,21 |
Citation | 671 A.2d 22,341 Md. 408 |
Parties | , 28 UCC Rep.Serv.2d 767 HARTFORD FIRE INSURANCE CO. v. MARYLAND NATIONAL BANK, N.A. Misc., |
Court | Maryland Court of Appeals |
Robert W. Ludwig, Jr. (C. Erik Gustafson, Ludwig & Welch, P.L.L.C., on brief), Washington, DC, for Appellant.
Jefferson V. Wright (E. Hutchinson Robbins, Jr., Kimberly L. Limbrick, Miles & Stockbridge, on brief), Baltimore, for Appellee.
Argued before MURPHY, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, KARWACKI, BELL and RAKER, JJ.
In this case, we determine whether a drawer can bring suit against a depositary bank when (1) it accepts a check with no indorsement for deposit into an account other than that of the named payee or (2) when the depositary bank accepts a check in violation of a restrictive indorsement.
From 1969 to 1993, Eugene Carbaugh served as the head of the accounts payable department of the Prince George's County Board of Education (the Board). In 1982, Carbaugh began submitting fictitious bills to the Board using names such as "PEPCo" and "Bionomics Product Co." After checks were issued by the Board to pay the fictitious bills, Carbaugh deposited the checks into bank accounts opened in his name at Maryland National Bank (MNB). 1
Carbaugh's scheme was not discovered until 1993. By then, he had stolen about $1.1 million dollars from the Board. The Board recovered most of its losses from the Hartford Fire Insurance Co. (Hartford), its insurance carrier. As subrogee and assignee of the Board's claims, Hartford brought an action in the United States District Court for the District of Maryland against MNB seeking to hold MNB liable for the Board's loss.
In July 1995, the district court issued a memorandum of partial decision in which it concluded that MNB had accepted at least eight and possibly as many as fifty checks containing restrictive indorsements, in violation of those restrictive indorsements. As found by the district court, In addition, the district court found that MNB improperly accepted 35 checks from Carbaugh written to "BIONOMICS PRODUCTS CO INC" or "PEPCo" with missing indorsements; it noted by way of example that
In its memorandum, the district court also found that in accepting checks with missing indorsements and in violation of restrictive indorsements, MNB failed to follow commercially reasonable banking practices. It further concluded that if a drawer can bring an action directly against a depositary bank under Maryland law, MNB would be liable to Hartford for improperly disbursing funds to Carbaugh for those checks with missing or restrictive indorsements.
The district court, however, found the question of whether the drawer of a check could sue a depositary bank to be a "significant, debatable and unresolved question[ ] of Maryland law." To resolve this issue, the district court certified the following two questions to this Court pursuant to the Maryland Uniform Certification of Questions of Law Act, Maryland Code (1995 Repl.Vol.) §§ 12-601 through 12-609 of the Courts and Judicial Proceedings Article and Maryland Rule 8-305:
1. Can the drawer of a check recover from a depositary bank that accepted the check with a missing indorsement?
2. Can the drawer of a check recover from a depositary bank that violated a restrictive indorsement?
The rights and duties of drawers and depositary banks are governed by Maryland Code (1975, 1992 Repl.Vol., 1995 Supp.) Titles 3 and 4 of the Commercial Law Article, which are essentially the same as Articles 3 and 4 of the Uniform Commercial Code (UCC). 2 In addition, where the Commercial Law Article does not expressly resolve an issue, "the principles of law and equity ... shall supplement its provisions." § 1-103. In a case such as this, where Titles 3 and 4 do not directly define or limit a drawer's right of action, we must look to the structure of rights and duties explicitly imposed by statute and any pre-existing rights and duties under Maryland's common law.
Under Titles 3 and 4, "[t]o the extent that the forger is unavailable or insolvent, the burden of loss from a forged indorsement is generally placed on the person who dealt with and took the instrument in question from the forger." George C. Triantis, Allocation of Losses from Forged Indorsements on Checks and the Application of § 3-405 of the Uniform Commercial Code,39 Okl.L.Rev. 669, 669 (1986). In the typical case, Titles 3 and 4 place ultimate liability for losses resulting from a forged indorsement upon the depositary bank because the depositary bank first accepted the check containing the forged indorsement.
Regardless of who is ultimately liable for such losses, the drawer must initially bear the loss "in the form of the debit to his account with the drawee bank." Id. at 671. The issues in this case focus on the means by which the drawer can seek to shift this loss to the depositary bank. Titles 3 and 4 explicitly provide one means by which the drawer can recover any losses suffered as a result of a forged indorsement. Because a check containing a forged indorsement is not "properly payable," the drawer can require the drawee bank to re-credit the drawer's account. See § 4-401(1) ( ). The drawee bank can then proceed against the depositary bank for a breach of the depositary bank's warranty of title under § 4-207(1)(a). 3
In addition to this remedy, some jurisdictions have allowed the drawer to sue a depositary bank for conversion or to bring suit under other common law causes of action such as money had and received or negligence. Kelly v. Central Bank and Trust Co., 794 P.2d 1037 (Colo.App.1989) ( ); Underpinning, Inc. v. Chase Manhattan, 46 N.Y.2d 459, 414 N.Y.S.2d 298, 298, 386 N.E.2d 1319, 1319 (1979) ( ); Sun 'n Sand v. United California Bank, 21 Cal.3d 671, 148 Cal.Rptr. 329, 346, 582 P.2d 920, 937 (1978) ( ); Commercial Credit Corp. v. Citizens National Bank, 150 W.Va. 196, 144 S.E.2d 784 (1965) ( ); see also G.F.D. Enterprises, Inc. v. Nye, 37 Ohio St.3d 205, 525 N.E.2d 10 (1988) ( ).
Hartford maintains that "under Maryland law, the drawer of a check who retains title ... may bring an action against a depositary bank that wrongfully pays its proceeds." Hartford asserts that this result is mandated by our older case law, and that it has not been altered by Maryland's passage of the Uniform Commercial Code. In contrast, MNB contends that a drawer cannot sue a depositary bank for conversion because the depositary bank never handles the drawer's funds. Instead, MNB asserts, a drawer must recover its losses from the drawee bank, and the drawee bank is responsible for bringing a claim against the depositary bank. To hold otherwise, according to MNB, would "eviscerate[ ] the careful allocation of rights and liabilities set forth in the Maryland Commercial Code."
Before addressing these contentions, it is necessary to emphasize the differences between the present case and cases involving only forged indorsements. At this time, we need not consider whether a drawer can sue a depositary bank for conversion when the depositary bank accepts a check containing a non-restrictive forged indorsement. That issue is not properly before us for two reasons. First, Title 3 explicitly precludes Hartford from recovering for any checks accepted by MNB that contained only a forged, non-restrictive indorsement. In addition, MNB would have failed to act reasonably and to properly obtain title to the checks even if all indorsements on those checks had been genuine.
Although a depositary bank generally must bear any loss resulting from its acceptance of a check containing a forged indorsement, § 3-405(1) shifts the loss to the drawer in certain cases of employee embezzlement. Section 3-405(1) provides that
[a]n indorsement by any person in the name of a named payee is effective if ... [a] person signing as or on behalf of a maker or drawer intends the payee to have no interest in the instrument; or ... [a]n agent or employee of the maker or drawer has supplied him with the name of the payee intending the latter to have no such interest.
Because an indorsement signed by its embezzling employee is "effective" against the drawer, the drawer cannot recover from the drawee or depositary banks, and the drawer must bear any losses resulting from the employee's embezzlement. 4 For this reason, § 3-405(1) specifically precludes Hartford from holding MNB liable for its acceptance of checks containing indorsements forged by Carbaugh when MNB did not violate any restrictions placed on those indorsements.
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